Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services.

Amazon's Results Illustrate What the Long Game Looks Like

Some investors were initially disappointed with Amazon's results, but those with a longer time horizon took this quarter's results in stride.

Anticipation was high going into e-commerce leader Amazon.com's (NASDAQ:AMZN) financial report. The stock was up a remarkable 40% this year alone and had crested the psychological barrier of $1,000 per share. The third annual Prime Day was on the books, having been a resounding success, and investors likely expected the company to continue its recent performance by trouncing expectations.

Amazon continued to march to the beat of a different drummer, however. While its revenue came in higher than forecast, the company posted profits that were significantly lower than anticipated leaving some investors scrambling for answers. The culprit? Amazon continues to invest in the future while being less concerned with the quarterly concerns of the market and short-thinking investors. Here's a look at what happened and why it doesn't matter.

The numbers

Revenue came in at $37.95 billion, up 25% year over year, or 26% in constant currency. Net income of $197 million or $0.40 per share, was significantly lower than the $857 million or $1.78 per share in the prior year quarter.

Metric

Q2 17

Q2 16

Change (YOY)

Revenue

$37.96 billion

$30.40 billion

25%

Operating Expenses

$37.33 billion

$29.12 billion

28%

Operating Income

$628 million

$1.29 billion

(51%)

Net Income

$197 million

$857 million

(77%)

Earnings Per Share (diluted)

$0.40

$1.78

(78%)

DATA SOURCE: AMAZON.COM SEC FILINGS. YOY = YEAR OVER YEAR.

Amazon's own internal forecast guided for revenue between $35.25 billion and $37.75 billion and operating income between $425 million and $1.075 billion -- exceeding its estimates for revenue, but not coming anywhere close for income. Amazon admitted this isn't an exact science, stating:

The following forward-looking statements reflect Amazon.com's expectations as of April 27, 2017, and are subject to substantial uncertainty. Our results are inherently unpredictable and may be materially affected by many factors.

Amazon is playing the long game. Image source: Amazon.

The long game

The company made numerous strategic investments during the quarter, the most notable being an increase in fulfillment capacity and logistics that would be coming online in the second half of this year to handle increases in its Fulfillment by Amazon (FBA). Using this program, sellers ship their products to Amazon's Warehouses, where they are stored, picked, packed, and shipped to customers by Amazon. Many of these products become eligible for Amazon's Prime 2-day (or faster) shipping.

Another area of significant investment was video content, which would again see increasing spending both sequentially and year-over-year. Amazon pointed to its 16 Emmy nominations for its original content and the nationwide release of its feature film The Big Sick, which has received widespread critical acclaim, with scores of 87 on Metacritic and 98% on Rotten Tomatoes. As Amazon seeks to increase the value of its Prime customer loyalty program, it sees streaming video as an important value added service for its members. Last year, the company also made its Prime Video service available as a monthly subscription to non-Prime customers.

The company saw strong usage growth in Amazon Web Services (AWS), its cloud computing service, which increased 71% over the prior year quarter, as well as the largest quarter-over-quarter and year-over-year revenue increase to date. Gross margin expanded 130 basis points, and the increased demand led to additional infrastructure investment.

Amazon highlighted a number of metrics from its just completed third annual Prime Day -- its biggest ever -- signing more new members than any day in the company's history. It was also the biggest selling day for Amazon devices, with record sales for Echo, Fire tablets, and Kindle devices. The Echo Dot smart speaker was the best-selling product sold on the site. Amazon has a vested interest in increasing the roles of its Prime members, as it is estimated they spend nearly twice as much annually as non-members.

The down low

Amazon is looking far into the future and refuses to be beholden to the quarterly hoops set for it by Wall Street. While this might make for some volatility over shorter term, the company is setting itself up for success for years, and even decades from now.

Author

Daniel W. Vena, CPA, CGMA is long-term investor searching for intangibles that provide explosive growth opportunities in his investments. He served on active duty with the US Army and has a Bachelors degree in accounting.
Follow @dannyvena